A Risk-Averse Manager Is Hired to Run a Firm for Shareholders

question 10

Multiple Choice

A risk-averse manager is hired to run a firm for shareholders. If the manager's effort can be observed and specified in a contract,which would be the best employment contract?

• A)a high-powered incentive contract to elicit the most effort.
• B)a fixed salary paid as long as the required effort is undertaken.
• C)a proportion of profits paid as long as the required effort is undertaken.
• D)a wage well in excess of his or her outside opportunity.

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Definitions:

Psychic Costs

Non-monetary costs related to emotional stress or mental effort involved in undertaking an activity or making a decision.

Fire Protection Program

encompasses the policies, practices, and tools aimed at preventing, mitigating, and responding to fires.

Expected Loss

The anticipated amount of loss or damage assessed in terms of its probability and the severity of the loss.

Insurance Premium

The amount that individuals or organizations pay for an insurance policy to cover risk.